Insurance (prudential standard) determination No. 1 of 2014 - GPS 117 - Capital Adequacy: Asset Concentration Risk Charge

Administered by Department of the Treasury

Legislation au F2014L00794 Not in force Legislative Instrument

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Insurance (prudential standard) determination No. 1 of 2014

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Insurance Act 1973, section 32

Under subsection 32(1) of the Insurance Act 1973 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by general insurers and authorised non-operating holding companies (authorised NOHCs). Under subsection 32(4) of the Act, APRA may, in writing, vary or revoke a prudential standard.

On 17 June 2014, APRA made Insurance (prudential standard) determination No. 1 of 2014 (the instrument) which revokes Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge made under Insurance (prudential standard) determination No. 7 of 2012 and determines a new Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge (GPS 117).

The instrument commences on 1 July 2014.

  1.    Background

The Asset Concentration Risk Charge relates to the risk of an insurer’s concentrations in exposures to a particular asset, counterparty or group of related counterparties resulting in adverse movements in the regulated institution’s capital base. GPS 117, applicable to general insurers and Level 2 insurance groups, sets out the method for calculating the Asset Concentration Risk Charge.

 

The Asset Concentration Risk Charge for each exposure of an insurer to a particular asset, counterparty or group of related counterparties is the amount by which this exposure exceeds the limits set out in Attachment A of GPS 117. Separate treatment applies for reinsurance exposures and non-reinsurance exposures.

 

2.      Purpose and operation of the instrument

The purpose of this instrument is to revoke GPS 117 and determine a new GPS 117 to clarify the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge.

APRA has made minor amendments to the definition of APRA-regulated groups. The definition, provided in paragraph 16 of the new GPS 117, is used to determine the asset concentration limits for non-reinsurance exposures.

 

Under the now revoked version of GPS 117, the definition was drafted such that a counterparty is not part of an APRA-regulated group if the ultimate parent is not APRA-regulated. The application of this definition resulted in lower limits for exposures to counterparties that are APRA-regulated, but owned by an overseas parent. This was not APRA’s intention when drafting the Prudential Standard.

 

This instrument determines a new version of GPS 117 that makes minor amendments to clarify APRA’s intent. APRA has specifically included references to APRA-regulated counterparties in paragraph 16 of GPS 117. This ensures that exposures to counterparties that are APRA-regulated (but foreign owned) will be subject to the same asset concentration limits as exposures to counterparties where the ultimate parent is APRA-regulated.

 

This instrument will ensure the correct application of the Prudential Standard across the industry. This will ensure that general insurers and Level 2 insurance groups correctly calculate the Asset Concentration Risk Charge on non-reinsurance exposures to counterparties that are APRA-regulated, but owned by an overseas parent.

 

As the amendment increases the asset concentration limit of certain non-reinsurance exposures, there may also be a decrease in the Asset Concentration Risk Charge and therefore the prescribed capital amount for a small number of general insurers and Level 2 insurance groups.

 

3.      Consultation

The instrument is minor or machinery in nature and does not substantially alter existing arrangements.

4.  Regulation Impact Statement

The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required for this legislative instrument.

5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.


Attachment A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Insurance (prudential standard) determination No. 1 of 2014

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Overview of the Legislative Instrument

This Legislative Instrument makes amendments to Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge to clarify the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge.

Human rights implications

APRA has assessed this Legislative Instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the instruments are compatible with human rights.

Conclusion

This Legislative Instrument is compatible with human rights because it does not raise any human rights issues.

 

Overview

The Insurance (prudential standard) determination No. 1 of 2014 was enacted to address a gap in the application of Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge, which previously did not correctly apply to certain non-reinsurance exposures, particularly those involving APRA-regulated counterparties owned by overseas parents. This determination, made by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, aims to rectify the definition of APRA-regulated groups to ensure consistent application of asset concentration limits across the industry. By clarifying the treatment of such exposures, the determination ensures that the Asset Concentration Risk Charge is accurately calculated, potentially leading to a decrease in the prescribed capital amount for some insurers. This legislative instrument is designed to maintain the integrity and stability of the insurance sector by aligning regulatory standards with APRA's original intent.

Scope and Application

The Insurance (prudential standard) determination No. 1 of 2014, issued by the Australian Prudential Regulation Authority (APRA) under section 32 of the Insurance Act 1973, applies to general insurers and authorised non-operating holding companies (authorised NOHCs) within the Australian jurisdiction. This instrument was enacted to revoke the previous Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge and to establish a new version of the standard. The purpose of this amendment is to rectify the treatment of certain non-reinsurance exposures, ensuring that the Asset Concentration Risk Charge is correctly calculated for exposures to APRA-regulated counterparties, even if they are foreign-owned. The new standard aims to ensure uniform application of the Prudential Standard across the industry, potentially leading to a decrease in the Asset Concentration Risk Charge and prescribed capital amount for some general insurers and Level 2 insurance groups. The instrument came into effect on 1 July 2014 and does not require a Regulation Impact Statement or consultation as it does not substantially alter existing arrangements. APRA has also confirmed that this legislative instrument is compatible with human rights as it does not engage any rights or freedoms recognised in the international instruments under the Human Rights (Parliamentary Scrutiny) Act 2011.

Key Provisions

The Insurance (prudential standard) determination No. 1 of 2014 primarily involves the amendment and clarification of Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge (GPS 117). Under section 32(1) of the Insurance Act 1973, the Australian Prudential Regulation Authority (APRA) has the authority to determine these standards. This determination revokes the previous GPS 117 and establishes a new version effective from 1 July 2014. The key change in the new GPS 117 concerns the definition of APRA-regulated groups, which determines the asset concentration limits for non-reinsurance exposures. Previously, the definition resulted in lower limits for certain exposures, which was not APRA’s intended outcome. The new version clarifies that exposures to APRA-regulated counterparties, even if foreign-owned, should be subject to the same asset concentration limits as those with APRA-regulated ultimate parents. The obligations imposed by this determination on general insurers and Level 2 insurance groups are primarily centred around the correct application of the revised asset concentration limits. These entities must ensure that their calculations of the Asset Concentration Risk Charge accurately reflect the new definitions and standards outlined in GPS 117. This involves reviewing and potentially adjusting their exposure limits to comply with the clarified criteria. Failure to do so could lead to discrepancies in the calculation of the Asset Concentration Risk Charge, impacting the prescribed capital amounts. In terms of potential breaches and consequences, the legislation does not explicitly detail specific offences, penalties, or civil/criminal consequences within the explanatory statement. However, non-compliance with APRA’s prudential standards generally could lead to regulatory scrutiny, enforcement actions, or financial penalties. Although the explanatory statement does not specify maximum penalties, breaches of APRA’s standards could result in various regulatory measures, including fines, public reprimands, or more stringent oversight and reporting requirements. Ensuring adherence to the new GPS 117 is crucial for avoiding such regulatory repercussions and maintaining compliance with APRA’s requirements.

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